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Neogen Corporation's (NASDAQ:NEOG) price-to-earnings (or "P/E") ratio of 69.3x might make it look like a strong sell right now compared to the market in the United States, where around half of the companies have P/E ratios below 16x and even P/E's below 9x are quite common. However, the P/E might be quite high for a reason and it requires further investigation to determine if it's justified.
While the market has experienced earnings growth lately, Neogen's earnings have gone into reverse gear, which is not great. One possibility is that the P/E is high because investors think this poor earnings performance will turn the corner. If not, then existing shareholders may be extremely nervous about the viability of the share price.
Where Does Neogen's P/E Sit Within Its Industry?
It's plausible that Neogen's particularly high P/E ratio could be a result of tendencies within its own industry. You'll notice in the figure below that P/E ratios in the Medical Equipment industry are also significantly higher than the market. So we'd say there is merit in the premise that the company's ratio being shaped by its industry at this time. In the context of the Medical Equipment industry's current setting, most of its constituents' P/E's' P/E's would be expected to be raised up greatly. Whilst this can be a heavy component, industry factors are normally secondary to company financials and earnings.
Want the full picture on analyst estimates for the company? Then our free report on Neogen will help you uncover what's on the horizon.
Is There Enough Growth For Neogen?
There's an inherent assumption that a company should far outperform the market for P/E ratios like Neogen's to be considered reasonable.
Retrospectively, the last year delivered a frustrating 5.7% decrease to the company's bottom line. Even so, admirably EPS has lifted 38% in aggregate from three years ago, notwithstanding the last 12 months. Accordingly, while they would have preferred to keep the run going, shareholders would probably welcome the medium-term rates of earnings growth.
Turning to the outlook, the next year should demonstrate the company's robustness, generating growth of 5.8% as estimated by the four analysts watching the company. Meanwhile, the broader market is forecast to contract by 11%, which would indicate the company is doing very well.
In light of this, it's understandable that Neogen's P/E sits above the majority of other companies. Right now, investors are willing to pay more for a stock that is shaping up to buck the trend of the broader market going backwards.
What We Can Learn From Neogen's P/E?
The price-to-earnings ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.
We've established that Neogen maintains its high P/E on the strength of its forecast growth potentially beating a struggling market, as expected. Right now shareholders are comfortable with the P/E as they are quite confident future earnings aren't under threat. Our only concern is whether its earnings trajectory can keep outperforming under these tough market conditions. Although, if the company's prospects don't change they will continue to provide strong support to the share price.
We don't want to rain on the parade too much, but we did also find 1 warning sign for Neogen that you need to be mindful of.
If P/E ratios interest you, you may wish to see this free collection of other companies that have grown earnings strongly and trade on P/E's below 20x.
This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
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